Simple remedies – pre-agreed damages

One of my 10 essentials for a construction contract is to agree the remedies one party will have if the other breaches the contract.

A common remedy for construction contracts is to agree damages payable for a specific  breach. Typically these are the employer’s remedy for delays to completion, but there is no real reason – except habit – why they are not also used for other breaches or other trigger events.

FIDIC have recently published their 2021 Green Book, or short form contract. It is concise (yay), and it also includes some innovative features (double yay). Even better, they have relied on pre-agreed damages as the remedy for a wider range of trigger events and breaches.

Prolongation costs are the contractor’s extra costs arising from certain delays to the project. Where those delays are the responsibility of the client (client acts or those of third parties), then the contractor often has a right to right to recover its additional costs. Under NEC, these costs are ascertained under the compensation event process. Under JCT, these costs are ascertained under the process for relevant matters.

Under the FIDIC Green Book, a formula is used to calculate an estimate of the contractor’s prolongation costs. Once the principle of liquidating these losses is agreed, the debate will no doubt centre on the accuracy of that formula. As with most liquidated damages remedies, the formula calculation is expressly stated to be the contractor’s only (or exclusive) remedy for costs relating to these delays.

Termination costs are the costs payable to one of the parties when the contract is terminated.

When the contract is terminated for the contractor’s insolvency, the FIDIC Green Book allows the employer to recover 20% of the value of those works which the contractor has not carried out.

Where the contract is terminated for employer breach or by the employer without contractor breach (known as termination at will), the contractor can recover demobilisation and other costs plus 10% of the value of the works which it has not carried out.

The FIDIC Green Book also includes a right to omit works (which must be express) and a similar calculation also applies – the contractor is entitled to recover the costs of the omission plus 10% of the value of the omitted works. 

Is it fair?

The argument will always be that these sums do not necessarily compensate the full losses or costs incurred by one of the parties. But the simplicity of this remedy is that once the trigger event has occurred, a quick calculation enables immediate payment or deduction of the relevant compensation.

It creates certainty for the parties – the employer can decide if it wants to eg omit works or terminate for convenience based on the costs of that decision. For events beyond the parties’ control, like delays or termination for insolvency, then a fast remedy provides certainty of process, costs and outcome when everything else may be and feel very uncertain.

It may not be a perfect solution, but generally liquidated damages are fair.

What should you do?

If you are FIDIC Green Book user, consider whether the standard formulae and percentages will provide an adequate or sensible level of compensation. Once written into your contract, you will struggle to argue that they are not payable.

If you are not a FIDIC Green Book user, consider whether your contract could and should adopt liquidated damages for more trigger events. These are simple remedies which help you settle claims quickly and easily, and avoid disputes.

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